Trust and estate fiduciaries, take note: you still have time to improve your 2022 tax position. The U.S. Tax Code gives fiduciaries of trusts and estates the option to make additional distributions to their beneficiaries up to 65 days into the new year. This small 65-day window can be a great planning opportunity if you know how to take advantage of it.
Section 663(b) of the U.S. tax code allows fiduciaries of estates and complex trusts to elect into what is informally known as the “65-day election.” The 65-day election gives fiduciaries an additional 65 days after the end of the fiscal year to make beneficiary distributions and still be able to report them on their prior-year tax return. The irrevocable annual election can be made by checking a box on Page 3 of Form 1041 at the time of filing, including any extensions. Late elections may be approved by the IRS if you can prove that you acted reasonably and in good faith. If you choose to make an election for the 2022 tax year ending December 31, 2022, the 65-day deadline will expire on March 6th. This gives you a little less than a month to make additional distributions.
Benefits of the Election
By utilizing this 65-day rule, you can distribute just the right amount of income you need to optimize your tax strategy. Making additional income distributions can help you lower your tax rate. The tax brackets for trusts and estates are quite compressed, so even small distributions can bump your trust down a tax bracket or two. If your trust is reporting a higher tax rate than your beneficiary, moving income from the trust to the individual by way of a distribution will
save tax dollars overall. Distributing additional income may also help with Medicare surtax planning. The 3.8% Medicare surtax is assessed on a trust’s or estate’s undistributed “net investment income.” Net investment income is passively-earned income such as interest, dividends, capital gains, and rental income, reduced by certain investment expenses. Trusts or estates that have adjusted gross income (AGI) exceeding $13,450 are liable for the Medicare surtax. The lesser of:
- 1. The entity’s undistributed net investment income, or
2. The excess of the entity’s AGI over $13,450– will be taxed at 3.8%. A simple way to avoid the Medicare surtax is to ensure your entity’s AGI does not creep over that $13,450 limit. You can easily make income distributions during this 65-day period to bring your AGI back down below $13,450.
- Next Steps
If you think this election could benefit your entity, get in contact with us right away. We can help you determine the optimal distributions to meet your tax and fiduciary goals. This 65-day period gives us enough time to see the entirety of your prior-year activity so that we can perform an exact tax calculation rather than relying on an estimate. Every dollar counts, and we want to help you save every tax dollar that you can. We do, however, want you to remain faithful to your role as a fiduciary. Fiduciaries must act in the best interests of their beneficiaries, so your decision to elect this 65-day rule should not be driven solely by taxes. Making a distribution should first and foremost align with your fiduciary duties. We would also like to express how important adequate record-keeping is. Because distributions will span multiple tax years, you are at risk of double-
counting or losing a distribution. Keep records of every distribution you make and assign them to one, and only one, tax year.
This 65-day period will expire soon, so give us a call right away if you are considering this election. We are here to help.